Two Hong Kong-listed firms controlled by Lawrence Ho - Melco International Development and Summit Ascent - entered into an agreement to invest in 51% of Hong Kong company Oriental Regent, which owns a casino resort in Primorye, Russia.


The casino was under construction and had a planned total investment of US$130 million.  Summit Ascent will invest two billion roubles (HK$463.7 million) for a 46% stake in Oriental Regent, while Melco will pay 216.7 million roubles for a 5% interest.  The casino resort sits on a 90,455 square metre plot and will have a planned gross floor area of 31,630 sq metres.  It will have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables and 40 mass market gaming tables, and is expected to open in September 2014.


"The casino resort has the advantage of being geographically close to the target feeder markets, the three Chinese provinces in northeastern China, namely Heilongjiang, Jilin and Liaoning," said Summit Ascent, which invests in property and supplies building equipment.  "Russia offers a favourable tax environment for gaming business compared to other jurisdictions. The investment will give the company a first mover advantage as the proposed casino resort will most likely be the first legal casino to start operating in the Far Eastern Region of Russia."


The casino will pay Summit Ascent a fee of 3% of its GGR and pay Melco a consultancy fee of 0.3% of its GGR.  Under this agreement, Oleg Drozdov, a Russian businessman engaged in the construction business in Primorye, will own 30% of the casino resort, and Firich Enterprise, a gaming supplier listed in Taiwan, will own a further 19%.



Macau Legend Development Ltd has signed a non-binding agreement with Japanese pachinko operator Dynam Japan Holdings Co Ltd to set up and operate at least 100 gaming machines at Macau Fisherman’s Wharf.  Friday’s agreement will also see Dynam market Macau Legend’s hotels and casinos to its customers in Japan and South Korea.  The five-year deal begins next year.

Macau Legend reported a 5.7% fall in its first-half net profit to HK$266.7 million (US$34.4 million).  It blamed the drop on one-off costs of listing on the Hong Kong Stock Exchange.

Information Surprise

“Information itself is best defined as surprise.”

-George Gilder


The first four chapters of George Gilder’s Knowledge and Power are right up my alley: “The Signal In The Noise”, “The Science of Information”, “Entropy Economics” – yes, someone else is talking “entropy” in the same sentence as markets! #beauty


On #OldWall, Gilder nails it: “The war between the centrifuge of knowledge and the centripetal pull of power remains the prime conflict in all economics.” And on risk management: “It is an economics of surprise that distributes power as it extends knowledge.” (page 5)


Think that through. In our profession, new information is surprise. If it wasn’t, why did so many risk going to jail? There is no easier way to generate returns than having inside information. Perversely, the road less travelled is the legal one. That’s why the 2.0 processes are taking mind share. We win and lose in an open forum of transparent information flow. We thrive by Embracing Uncertainty.


Back to the Global Macro Grind


If many pieces of information aren’t surprising you throughout your risk management day, you probably don’t have enough factors in your model. Price is surprise. So is data. Information surprise is everywhere.


So how do you absorb it all and remain sober? The answer is it’s a grind. Multiple-factors, multiple-durations – the market waits for no one. Being proactively prepared to contextualize the most immediate-term of surprises is only the beginning.


Bucketing the big stuff into intermediate-term TREND macro themes helps, provided that your process is flexible enough to acknowledge that TRENDs can change. But what is change? In Chaos Theory speak, can a major macro phase transition be undone?


Of course, in the intermediate-term, everything and anything can be undone – this is the fulcrum principle of central planning! In the long-run, gravity takes hold of anti-dog-eat-dog-cycle-smoothing though. So you want to be on the lookout for that!


There is a massive phase transition that is being baked into market expectations right now. The causal driver of that expectation shift is whether or not the US Federal Reserve is done with its anti-gravity policy to devalue the US Dollar and monetize the USA’s debt.


The main regime changes in a #RatesRising environment (versus one discounting 0% rates in perpetuity) are as follows: 

  1. Growth (as an investing style) outperforms slow-growth Yield Chasing
  2. Strong Currency countries outperform Currency Crisis countries 

That’s basically what happened again last week:

  1. Nasdaq and Russell2000 (growth indices) were +1.5% and +1.4%, respectively
  2. US Consumer Staples Stocks (XLP) were -0.2% on the wk (-2.85% for the AUG to-date)
  3. Asian (ex-Japan) Equities were -3.3% (down -8% for the YTD)

Parts 1 and 2 of that are pretty straightforward – unlevered US domestic innovation (growth stocks) are absolutely ripping this year versus a basket of pretty much anything slow-growth. That’s not new as of last week either. That’s been the TREND since June.


In June, #RatesRising ripped a massive amount of entropy into markets. Most people get that by now. What less people have realized is how powerful a combination A) #RatesRising  and B) #StrongDollar can be versus Emerging Markets (both equity and debt).


USD didn’t go down for the 2nd week in a row last week, here’s how that new information flowed to Indonesia, Chile, etc.:

  1. Emerging Markets (MSCI Index) = -2.6% on the wk to -11.6% YTD
  2. Emerging Markets Latin American Index (MSCI) = -1.5% on the wk to -17.2% YTD

Now, to be fair to the Chileans, they are also right levered to another major macro risk factor that comes into play during #StrongDollar and #RatesRising regimes – we call it #CommodityDeflation (the CRB Commodities Index = -0.6% last wk = -1.4% YTD).


Since #StrongDollar was more of a 1st six months of 2013 story doesn’t mean that the #CommodityDeflation risk ceases to exist (Coffee prices were -5.3% last wk to -25.2% YTD). Again, looking at the YTD scoreboard:

  1. Peru (metals/mining represents over 1/3 of the index) is the worst country in Global Equities at -19% YTD
  2. Chile and Brazil (both resource heavy indices) are 3rd and 4th worst in the world at -15% and -14% YTD, respectively
  3. Gold: despite its +4.5% month-over-month bounce off the lows, it is still -17.2% YTD

Ostensibly, there is new immediate-term TRADE information here to consider. If the US Dollar continues to weaken like it has from its July 2013 YTD highs, why can’t commodities and their related country stock market indices continue to re-flate?


Alternatively, the USD could be doing more of the same (building a gigantic base of higher-40yr-lows that were caused by the US cutting rates to zero), and this bullish Consumption (Growth) vs. bearish Commodities (Absolute Return Yield Chasing) theme remains intact.


The beauty of modeling macro the way that we do is that we don’t have to be certain about any of the answers to these questions. We simply have to absorb all of the information surprises we receive within the context of multiple durations, factors, and cycles – and make the highest probability call we can from there.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.72-2.95%


VIX 12.17-14.98

USD 80.89-81.76

Euro 1.32-1.34

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Information Surprise - chart

Information Surprise - positions

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

August 26, 2013

August 26, 2013 - dtr



August 26, 2013 - 10yr

August 26, 2013 - spx

August 26, 2013 - nik

August 26, 2013 - dax

August 26, 2013 - dxy

August 26, 2013 - euro

August 26, 2013 - oil



August 26, 2013 - VIX

August 26, 2013 - yen

August 26, 2013 - natgas
August 26, 2013 - gold

August 26, 2013 - copper


TODAY’S S&P 500 SET-UP – August 26, 2013

As we look at today's setup for the S&P 500, the range is 29 points or 1.29% downside to 1642 and 0.45% upside to 1671.       










  • YIELD CURVE: 2.44 from 2.44
  • VIX  closed at 13.98 1 day percent change of -5.28%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Durable Goods, July, est. -4.0% (prior rev. 3.9%)
  • 10:30am: Dallas Fed Mfg Activity, Aug., est. 3.9 (prior 4.4)
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
  • U.S. Weekly Rates Agenda


    • Under Sec. of Commerce for Intl Trade Francisco Sanchez visits Brazil, Uruguay to promote U.S. oil, gas exports
    • Washington Weekly Agenda


  • Amgen to buy Onyx for $10.4b to gain cancer market access
  • ONGC to pay Anadarko $2.64b for stake in gas field
  • Pritzker to buy TMS International in $1b deal: WSJ
  • Goldman options glitch limited to “tens of millions”: WSJ
  • Goldman puts 4 on leave after options error, FT reports
  • KPN wins America Movil’s support for $11b German deal
  • Wal-Mart puts India expansion on hold: FT
  • Weinstein’s “The Butler” tops box office for 2nd wknd
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • Consumer spending probably rose in July: Eco Weekly Preview
  • U.S. GDP, King Speech Anniv., Carney: Wk Ahead Aug. 26-31


    • No earnings scheduled from S&P 500



  • Rubber Enters Bull Market as Recovery in China Boosts Demand              
  • Hedge Fund Gold Bets at Six-Month High After Rally: Commodities
  • Rubber on Tokyo Commodities Exchange Advances Into Bull Market
  • Soybeans Rally the Most Since 2011 as Hot Weather Curbs Crops
  • Gold Swings as Investors Weigh Stimulus After Home Sales Decline
  • WTI Crude Trades Near Four-Day High Amid Economic Recovery Signs
  • Indonesia Can Expand Plantations to Add 2.3M Tons Sugar a Year
  • ThyssenKrupp Dividend Forecast Reduced to Zero by Bloomberg
  • Export-Quota Removal in Indonesia Seen Negative for Nickel Price
  • Palm Oil Rallies Most in Eight Months as Weather Hurts Soybeans
  • Iron Ore Strength Suggests Mild China Rebound: Morgan Stanley
  • Russia Offers Fukushima Cleanup Help as Tepco Reaches Out
  • Gold Is Last Man Standing as Rupee Fuels Inflation: India Credit
  • Indian Banks, Traders Extend Gold Import Suspension on Curbs


























The Hedgeye Macro Team














Takeaway: Current Investing Ideas: FDX, HCA, HOLX, MD, MPEL, NKE, NSM, SBUX, TROW and WWW


Below are the latest comments from our Sector Heads on their high-conviction, long-only stock ideas. Please note that our Financials team has added T. Rowe Price (TROW) to our Investing Ideas list this week.


FDX – The stock is just shy of a 52-week high and has outperformed the S&P 500 over that period, so it is not necessarily a contrarian stock.  On a valuation basis, the stock is cheap trading at less than 6x TTM EV/EBITDA and has net cash on its balance sheet (excluding leases). 


Many of the industrial data points that we track have moved favorably this summer, with rail, truck and airfreight indicators among them.  To the extent that the operating environment continues to strengthen, it could provide a tailwind to FDX’s restructuring efforts. 


FedEx also announced expanded options in for healthcare-related shipping, better accommodating items that require refrigerated environments.  Growth in higher margin, niche markets is a focus for the industry.


HCA – Back in 2009 indebted companies, hospitals included, had a rough time convincing the markets they were going to make it through the debt crisis.  It's easy to see what happened in the correlation between junk bond indexes such as JNK and hospital company stock prices both during the crisis and through the recovery. With #ratesrising and the junk bond indices getting pummeled as the 10-year yield moves out from under the federal reserves thumb, we are not seeing the same correlation and downward pressure on hospital stocks. 

HOLX – We continue to like the opportunity for HOLX under the Obamacare, even if the law's first days go poorly.   We estimated the additional number of Pap tests and mammography scans coming from the newly insured then took big cuts for the myriad of reasons why the law's targets are likely to fall short.  Whether its states not expanding Medicaid, the Exchanges not being ready, or simple confusion on the part of everyone involved, HOLX is likely to get a sizable boost to their revenue growth next year.

MD – We began taking a look at the role of temporary and part time workers on medical consumption this week.  The media continues to write stories about firms skirting Obamacare regulations by hiring temporary versus full time employees. Media accounts are largely based on anecdotes, but we have had trouble finding actual data that backs these claims up.  


It's a terrible idea that Obamacare's goal of insuring the uninsured and broadening medical security for some of the 50 million who go without insurance will lead to more people in temp jobs without health benefits.  The temp Trend is a risk to a broad range of healthcare companies including MD, but so far the facts don't check out on the temp trend.


Temp job growth is still outpacing all other employment, but the impact is minimal on non farm payrolls (NFP). Reducing the NFP by Temp jobs, and employment is still growing (right axis, thin blue and red lines)


MPEL – August revenue growth in Macau is trending in the +16-20% range. MPEL’s August revenue share of 14.2% remains above recent trends. We remain positive on Macau with MPEL leading the way, particularly in the margin-rich mass segment. 


NKE – Nike’s Brand Jordan is having a great start to "Back-To-School," with sales growth over the past three weeks accelerating from 10% to 20% to over 40% according to The NPD Group. Why does this matter, one might ask, given that it is only a sub-brand of a globally-diversified portfolio? Not really the mountain/molehill metaphor that one might think. In the US, Jordan has evolved from a mere shoe into a massive brand. Nike’s share of the market is 42%. The next largest brand? You guessed it -- Jordan at over 13%. Next in line? Adidas, which struggles to capture 7%. Rounding out the top five are Skechers at 4.3% and New Balance at 4.0%. Put another way, Jordan is 5x the size of Reebok, which once challenged the Nike Brand as the biggest sneaker brand in the US.


NSM –  There are two important intermediate term considerations for Nationstar investors. One is rates and the other is deals. The back half of 2013 is likely to see an increase in mortgage servicing-related deal activity as the big three (NSM, OCN, WAC) all raised their acquisition pipeline estimates during their second quarter results (by a combined $145 billion). Interestingly, NSM accounted for 70% of the increase. These deals historically have been accretive and catalytic for shares. We have no reason to think the result would be different in the coming quarters.


On the other hand, there is the #RatesRising dynamic. One of Hedgeye’s top themes at the moment is that long-term interest rates are likely to continue to move higher, making higher highs and higher lows. Rising rates are like an anchor on mortgage refinance volumes and Nationstar derives a substantial share of its earnings from refi activity. That said, Nationstar’s refi business is more defensive than many realize because it has a large contribution from HARP activity, which is less rate-sensitive than traditional refi volume.


Our expectation is that Nationstar shares will grind higher over the intermediate term on positive news around deals, but that rising rates act as a short-term headwind in the vacuum between deals.


TRADE: In the short-term, the market is and will continue to trade NSM inversely to long-term interest rates in the absence of other data, and rates have been grinding higher of late.


TREND: Over the intermediate term, the stock will trade around announcements of servicing acquisition deals. We think NSM remains well positioned here, alongside Ocwen and Walters.


TAIL: In the long-term, there is still a tremendous opportunity for non-bank servicers like Nationstar to roll-up the servicing business. NSM is well positioned to be a prime beneficiary. We continue to think consensus earnings estimates remain too low for 2013/2014.


SBUX – No material changes to our high conviction call on Starbucks as the stock continues to flirt with all-time highs. Yes, we acknowledge that SBUX is a “top pick” for many Wall Street analysts, but consensus can be right sometimes. Bottom line is we continue to like what CEO Howard Schultz is doing and the overall direction of Starbucks’ growth story. 


A strong third quarter earnings report simply highlights the power of one of the best pure plays in global growth in the Restaurants sector.  Cyclical factors, like improving coffee pricing, only add to the momentum as SBUX continues to push into new food and beverage segments in China and across the globe.

TROW – Financials Sector Head Josh Steiner and colleague Jonathan Casteleyn have moved shares of T Rowe Price (TROW) onto Hedgeye's best ideas list as a core holding. Simply put, we would buy and hold shares of TROW as we expect the company to benefit from the ongoing theme of a reallocation out of bonds with investors continuing to move into stocks.


T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past 10 years. With a disciplined process of carefully selecting the most talented investment professionals and producing and protecting the industry’s best stock performance, this allows TROW to consistently generate new inflow into its stock funds. The company has only had 3 quarterly outflows of client assets in the past 11 years which is an unmatched track record in the investment management industry.


With another good year of performance in the making, and a broader macro theme of bond fund flow in decline with an ongoing handoff to stock funds, the time is right for this leading equity fund manager and its investors to outperform. 


WWW – Ask any investor in retail for the most hated stock, and most will say JC Penney. Others will say Sears.  When asked who rounds out the top three, the consensus would probably say Radio Shack. Well those people will be overlooking a little shoe company based in Rockford MI called Wolverine Worldwide.


Yes, the stock is trading at 18 times earnings, giving the impression that it is loved – but the reality is that the Hedgeye Sentiment Monitor begs to differ. Our Sentiment Monitor triangulates sell-side ratings, buy-side short interest, and insider buying/selling and assigns a quantitative score accordingly. In WWW’s case, you can see that its current score is about 13, which means that investors are overly bearish.


A score closer to 90 (where many retailers sit today) would signify that the Street is overly bullish. Scores at the high and low end have both proven to be contra-indicators, meaning that overly bearish scores (like we have with WWW today) often leads to sell-side upgrades, short covering, and insider buys. While our positive stance on WWW is based on a longer-term fundamental view, this analysis certainly supports our positioning.            





Editor's note: This week, instead of our usual Macro Report, Sector Spotlight and Investing Term, we're trying something different.  While we know most of you are long-only investors, we wanted to give you a peek into research on some short ideas that we provide for our institutional clients.  These stock ideas from Hedgeye Sector Heads provide a deep research dive into shares of companies and markets we believe are poised to decline in value. Our team here at Hedgeye enjoys a successful track record on the long and short side and is dedicated to unlocking value on both for our clients. 


This week's first short idea comes from our Financials Team led by Josh Steiner and Jonathan Casteleyn. Please note that this note was originally published on August 15th. 


BEN Stock Starting to Track the 10 Year Bond Yield


Franklin Resources (BEN) - This is our favorite short idea in the group with its disproportionate exposure to both fixed income and retail investors (our least favorite exposures). When looking at BEN stock and the recent trajectory of the 10 year Treasury yield, the two variables appear to be tracking each other very closely. The 10 year Treasury yield bottomed on May 2nd at 1.63% which was also the recent high in BEN stock two weeks later on May 17th at over $56 per share. 


Since these closely grouped two week peaks, the substantial rise in the 10 year Treasury has marked a requisite decline in Franklin stock with a similar trajectory. In our chart below we have inverted the 10 year Treasury axis in order to simply show the relationship, but in beginning of July the slight rally in the 10 year also spurred a relief rally in shares of BEN which moved from near $45 per share to over $50 per share.


Interestingly the recent further sell off in Treasuries from 2.59% to 2.72% as of last night has also been in concert with BEN shares moving from over $50 to back near the $48 per share range. While the R-squared of the two variables isn't overly compelling at 0.32, the regression of daily 10 year Treasury yields and BEN stock would imply a near term trajectory to $46 per share for Franklin shares if the U.S. 10 year goes through a 3% yield. As more daily data comes in, this relationship may become more compelling, but it is just an initial observation for now.





Separating the Forest From the Trees In Emerging Markets


Our next short idea has worked out rather well since Hedgeye first began beating the drum. Our Macro Team believes that further appreciable downside remains here (and obviously upside for those on the short side). 


Please click here for access to this Hedgeye idea.


Tying Two Rocks Together: The LINN/BRY Merger


Our final short idea comes from Hedgeye Jedi Kevin Kaiser who heads up our Energy research. Kevin is a focused, no-nonsense sort of guy who smelled smoke in LINN Energy's (LINE) accounting practices, called it out and stood strong as investors long the stock fought back tooth and nail. Of course, the accounting smoke eventually led to fire in LINN's stock following news of an SEC inquiry. You may have read about his research in Barron's.


Please click here to access Kaiser's detailed research on why the stock has room to fall even further.

the macro show

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